Corporate Social Responsibility as Insurance

The question “should corporations actively invest in socially responsible stuff, or should they simply focus on making money?” continues to linger and re-emerge on the business agenda (especially, it seems, around the time that business-minds return from their annual swarm to Davos).

People are then quick to shout “but they are not two different things; behaving in a socially responsible way will in the long run also make you better off financially!” But in spite of the latest studies trying to provide hard evidence of the existence of that relationship, proof of that statement is unfortunately pretty hard to find.

And I say “unfortunately” because of course it would great if the socially responsible companies were also financially rewarded for their honorable endeavors. But it is hard to provide solid evidence for that.

For example, although we do know from research that socially responsible companies are usually the better-performers, the causality often seems to run the other way around: Once firms begin to make a healthy profit, they start acting in socially responsible ways. If losses pile up, the responsibility initiatives are often the first to go out of the door. Hence, socially responsible behavior does not make you a better performer; good financial performance leads firms to behave in more responsible ways. It seems it is a bit of a luxury product that we only indulge in if we feel we can afford it.

On the bright side, however, there is some interesting evidence that being socially responsible can actually help you if your company runs into some trouble.

Professors Paul Godfrey, Craig Merrill, and Jared Hansen, from Brigham Young University and the University of North Carolina, came up with a clever insight why the socially responsible types may be better off after all. They didn’t just look at the social and financial performance of all kinds of companies–they decided to specifically focus on companies that got into trouble because some negative event had happened to them. This could be the initiation of a lawsuit against the firm (e.g. by a customer), the announcement of regulatory action (e.g. fines, penalties) by a government entity, and so on. Then they measured what happened to the share price of the company as result of the event. Their finding? The degree to which you were punished by the stock market for the negative news depended on how much of a socially responsible company you were.

Firms that scored low on a social responsibility index saw their share price plummet if they had to announce a negative event. Firms with very good social track records did not see their share price go down that much. Paul, Craig, and Jared concluded that your socially responsible reputation acts as some sort of an insurance; when something bad happens to you (in the form of a serious customer complaint or a government fine) investors conclude that you probably made a genuine mistake and that you will definitely do better next time. That there is nothing structurally wrong with you or to worry about. However, when you are much more of a social villain, the stock market washes its hands of you, drops its financial support, and makes your share price plummet.

Thus, good guys are better off after all. And the dollars you spent on being socially responsible do pay themselves back–especially when you are in a bind.

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